The Financial Industry Regulatory Authority (Finra) has slammed Merrill Lynch, Raymond James & Associates Inc. (RJA), and Raymond James Financial Services Inc. (RJFS) with enforcement settlements that require the firms to pay approximately $12 million in restitution to customers who incurred “excess fees” on 529 college savings plans, based on the firms' failures to reasonably supervise 529 plan share-class recommendations, the regulator announced today.
“Merrill Lynch has agreed to pay restitution of at least $4 million relating to the sale of Class C shares to 529 plan accounts with young beneficiaries. RJA has agreed to pay more than $3.8 million in restitution and RJFS has agreed to pay $4.2 million in restitution,” Finra said in a statement.
“Returning money to harmed investors as quickly and efficiently as possible remains a priority,” said Jessica Hopper, senior vice president and acting head of Finra's Department of Enforcement. "Finra member firms must be cognizant of all costs to their customers when recommending a product. This is particularly important where an unsuitable recommendation may cause customers to incur higher fees year-after-year, especially in the case of young beneficiaries.”
Specifically, Finra found that Merrill Lynch, a subsidiary of Bank of America, and both Raymond James firms failed to establish and maintain a supervisory system and written procedures “reasonably designed to require registered reps or supervisors to evaluate beneficiary age and the number of years until expected withdrawals, combined with the different fees and expenses of the share classes, when making share-class recommendations,” Finra said.
529 plans, which are tax-advantaged municipal securities designed to encourage saving for future educational expenses of a designated beneficiary, are sold in different classes with different fee structures, like many mutual funds are.
Class A shares typically impose a front-end sales charge but charge lower annual fees compared to other classes. Class C shares typically impose no front-end sales charge but impose higher annual fees than Class A shares. Because Class C shares may be more expensive over longer holding periods, Class A shares are frequently a more suitable option for accounts with younger beneficiaries and longer investment horizons (and/or accounts that qualify for breakpoint discounts).
During the relevant time period for Merrill Lynch’s violations--January 2011 through December 2015—the firm was a distribution agent for 529 plans sponsored by Colorado, Connecticut, Illinois, Indiana, Iowa, Maine, Michigan, Nebraska, New Mexico, New York, Ohio, Oklahoma, Oregon, Rhode Island, South Carolina, Virginia, Washington D.C., West Virginia, and Wisconsin.
The Raymond James subsidiaries were fined for violations that took place between January 2008 and March 2017.
Raymond James spokesman Steve Hollister said the firm was “pleased to have resolved this matter.”
According to Hollister: “As part of an industry-wide review of share class selection in 529 savings plans and related supervision, and after many months of extensive cooperation with Finra, Raymond James has agreed to a settlement where it will credit current and former eligible clients, including interest. The firm’s policies and processes were previously enhanced to address the issues in Finra’s findings, and the remediation costs have been fully reserved. The firm is pleased to have resolved this matter,” Hollister said.